Should Bitcoin be included in your investment portfolio?

One of the most significant additions to the list of interesting internet innovations is bitcoin, a fast emerging digital asset that has revolutionized people's thinking about money and the transfer of assets and payments. Bitcoin has a unique selling point as a digital asset in that it assigns value in a secure way through a decentralized and well-distributed network. The rise of this crypto currency has been so meteorically that it recently peaked at over $1000 a unit.

Since its launch in 2008, it has gone from a niche software protocol and currency to a distinguished technology that stands to disrupt the conventional movement of billions of dollars across the traditional transaction markets that are dominated by global financial institutions.

A large number of financial industry technologists, media pundits and executives have chronicled a potential viability and success surrounding bitcoin.Part of the appeal lies in the power of its ledger system, its ability to store value and the infrastructure of a new payment rail.

Governments all over the world are providing preliminary frameworks and structures to aid in the regulation of the digital currency transactions, thereby bolstering the legitimacy of the emerging technology. With all the factors that are in place to help the growth of digital currencies, noticeably bitcoin, it is the opportune time for smart enough investors to consider the allocation of a portion of their portfolio to the digital currency asset class.

Bitcoin as a non-correlated assetAstute investors are seeking to build diversified portfolios in their effort to weather downturns and to capitalize on the upswings in the financial market. Portfolio diversification mostly based on the modern portfolio theory suggests that owning non-correlated assets such as bitcoin can help mitigate the downside risk.

While the market has undergone several tumultuous events such as the unprecedented vitality in the Chinese equities, Greek debt crisis, and the currency manipulation in the G20 countries, Bitcoin remains the best investment. Around. With the market disruptions, the time-frame for owning Bitcoin is slowly increasing as investors are ready to speculate on the price appreciation of the asset, and therefore hold a buy and hold strategy instead of daily trade.

The price volatility of Bitcoin has begun to fade away and the currency has come to stabilizeIn the year 2015, significant advancements characterized the bitcoin ecosystem. Some of the largest capital investments to-date occurred then, as there was increased participation of the credit card issuers and global markets. As bitcoin continues to mature and further the infrastructure built around it, the volatility will dampen. In fact, the missteps that made large swings in bitcoin price when it was first initiated have now been digested by the market. Over the last two years, the price of bitcoin has increasingly stabilized following the all-time high in late 2013.

Bitcoin as a way to enhance returnsIn addition to helping mitigate the downside risk, an investment in bitcoin can also improve the overall returns of owner portfolio. In our slow growth and low rate environment, the investors are looking for alternative assets to help boost returns. The best alternative asset to consider adding into the portfolio is bitcoin. Given its low correlation to the other assets, the decreasing volatility, an investment in bitcoins can help boost gains while at the same time adding up to minimal risks to one's overall portfolio.

When reallocation of a portion of commodities into bitcoin within the portfolio happens, the total performance is expected to increase by about 2.3%, with the portfolio likely to return -4.6%. The risk on the portfolio may remain relatively similar as measured by its annual standard deviation. While past performance doesn't guarantee the future results, it is valuable to add bitcoin into the 500 without having to take an additional risk. In particular, reallocating funds from an existing alternative asset such as commodities into growth assets such as bitcoin improves performance.

It is of utmost value to remember that we are in the early days of the bitcoins lifecycle, but the potential upside of the positive performance for bitcoin is tremendous. With the technology based solutions simplifying and reducing friction in existing processes, the value proposition for digital currencies seems promising.

Similar to the advent of mobile phones and their ability to transform communication, bitcoin, and the underlying technology is poised to revolutionize asset ownership and value transfer. As a result, it's no surprise that Bitcoin has emerged as the world shifts to a digital ecosystem.

Investors who consider adding bitcoin to their portfolios not only potentially monetize the long-term positive returns of the bitcoin price appreciation, but also diversify their investments. Allocating a portion of one's assets into biotin could prove profitable in the long run.

ProsInvestabilityInvestability is the first lens under which investors evaluate Bitcoin, which poses the question whether investors or individuals can take capital and still somehow have exposure to that asset class. The answer to the question is yes. Based on the exchange trading volume for Bitcoin, around $ 1 billion a day was traded during the first quarter of 2016. This is regardless of the fact that Bitcoin contains the same liquidity of the biggest Gold ETF (GLD) and approximately three times that of Vanguard's REIT ETF (VNQ) even though VNQ and GLD store much more in assets that is $56 billion and $34 billion respectively. Equal or superior volume with a good fraction of the assets under management will mean that bitcoin is punching above its weight.

Political- economic profileBitcoin is distinguished from other major asset classes by value, applications and governance. Bitcoin gains value from the fact that it can facilitate a variety of any transactions, starting with the basic one of enabling the money in the form of bitcoin to be sent all around the world, transparently, securely and without any cost. It has been termed as a consensus-based purely digital asset that was established in an increasingly digital and networked world.

The correlation of returnsThe best argument for the inclusion of bitcoin in a portfolio is its comparative strength. After a look into one year rolling correlation of-of the U.S Bonds, S&P 500 , Gold, Bitcoin, U.S. real estate, emerging market currencies and oil in the previous five years, the correlation would mean that if one item rises to at least 5%, so does the other asset. This does not apply to Bitcoin investment where the correlation is negative.

Risk-Reward ProfilesThe risk reward is best illustrated through the Sharpe Ratio, which is meant to measure the amount of returns from an asset per the unit of the taken risk. An individual could have a very high performing asset the terms of returns, but if it happens to be highly volatile that person could end up getting less returns for the risk that they are taking. The best assets therefore are those with high Sharpe Ratios because they will ensure a better compensation for the risk being taken. In the past five years, bitcoin has had consistently higher Sharpe ratios than any other asset class.

Cons
There is a (extremely low) likelihood that the price of bitcoins will be close to nothing in just a few years if all regulators around the world ban the crypto currency as a means of payment as it is already happening in some jurisdictions such as Russia and to some degree in China or if a super digital crypto currency takes its place. It is, therefore, worth investing an amount that you would be willing to lose.